Module 2 – Law relating to Wages and Bonus

Classes of 18.01.20-02.02.20

Theories of wages:

1. Marginal Productivity Theory: The marginal productivity theory of wage states that the
price of labour, i.e., wage rate, is determined according to the marginal product of labour. This
was stated by the neoclassical economists, especially J. B. Clark, in the late 1890s.

The term marginal product of labour is interpreted here in three ways: marginal physical product
of labour (symbolized by MPPL), value of the marginal product of labour (symbolized by VMP L)
and marginal revenue product of labour (symbolized by MRPL)
Assumptions of Marginal Productivity Theory of Wage:

i)Perfect competition prevails in products market and in labour market. Perfect competition in
product market implies that products are homogeneous and the price of the goods is given for all
firms in the market. Perfect competition in labour market also implies that labour as well as firms
behave as ‘wage-takers’; no one can influence the wage rate.

Limitations

i. In the real world, perfect competition does not exist—both in the product market and in the
labour market. Imperfect competition is found in all the markets. This theory, therefore, has
limited applicability in the real world. If it is applied to the imperfectly competitive market, the
workers will be subject to exploitation.

ii. Labour can never be homogeneous— some may be skilled and some may be unskilled. Wage
rate of a worker is greatly influenced by the quality of labour. A higher wage rate is enjoyed by
the skilled labour compared to the unskilled labour. This simple logic has been totally ignored by
the authors of this theory.

iii. Perfect mobility of labour is another unrealistic assumption. Mobility of labour may be
restricted due to socio-political reasons.
iv. The marginal productivity theory of wage ignores the supply side of labour and concentrates
only on the demand for labour. It is said that labour is demanded because labour is productive.
But why labour is supplied cannot be answered in terms of this theory.

2.Subsistence theory of wage : The subsistence theory of wage is also known as “iron law” of
wage. It was so named by physiocrats like Lassalle, a German economist and Quesnay, a
member of school of economists and developed by David Ricardo. The theory of population,
expounded by Malthus was also based on this “iron law”. According to this theory, wages tend to
remain at the subsistence level. Wages paid to workers is just sufficient to fulfill their basic
needs. Workers don’t have surplus income. If wages rises above this level, this leads to an
increase in the population because the increased prosperity of workers will encourage the
workers to marry sooner and increase population. This will increase labor supply. The increased
competition among workers for employment causes wages to fall again to the subsistence level.
Likewise, if the wages fall below the subsistence level, there will be fewer wages and no
prosperity. People will have less interest in marriage. Fewer children are born. This will reduce
the supply of labor.

Criticisms

1. Ignores the demand side of labor: This theory is one-sided. It explains the wages from the
supply side only. It completely ignored the demand for labor. But if a rise in wages leads to an
increase in population, the larger supply of labor may be balanced by an increase in the demand
for labor.

2.No direct relationship between wage level and population: According to this theory, population
increase if the workers are paid above the subsistence level but empirical evidences show the
decrease in population or its rater of growth in developed nations even if there is increase in
wage level. People spend money on education, family planning, skill development too.

3.Ignores trade unions: This theory has ignored trade unions through which the workers make the
collective bargaining for their benefits.
3. Wage Fund Theory: This theory is developed by classical economist named J.S Mill.
According to Mill, wage level is determined by wage fund and the number of worker’s
employed. To pay the laborer, a wage fund is raised. Once the wage fund id rose, it is kept
constant. The wage fund is distributed among the worker’s employed. The workers are assumed
to be paid equal amount. It is because the units of labor are homogeneous. If more workers are
employed each worker gets fewer amounts and if less number of workers is employed each
worker gets more amount of money. The wage level is given by the ratio of wage fund and
number of worker’s employed.

This theory can be explained with the help of table and figure as following:

Wage fund (W.F) No. of workers (N) Wage level (W.F/N)

Rs 1,00,00,000 50000 Rs 200

Rs 1,00,00,000 100000 Rs 100

Rs 1,00,00,000 150000 Rs 66.67

In the above table, wage fund raised is Rs 1, 00, 00,000. When the number of workers employed is
increased from 50000 to 100000 and 150000 the wage level is decreased from Rs 200 to Rs 100 and Rs
66.67 respectively. It is due to constant wage fund distributed among more workers.

In the above figure, the downward sloped convex curve represents inverse relationship between wage
level and no of workers employed.

Assumptions

• According to this theory, wage fund is rose before the employment of workers

• The workers are paid equally out of the wage fund

• The units of labor are homogeneous

• The wage level is flexible to the change in number of workers employed

• Money is just a medium of exchange

Criticisms

• Wage fund is not raised before employing the workers but is rather raised on the basis of
worker’s employed

• Wage paid to workers differs from place to place, time to time, person to person and organization
to organization.

• Units of labor are not homogeneous. They differ in skill, knowledge, strength, education, attitude
etc.

• Wage level is not flexible. Wage level fall is opposed by workers and trade unions

• Money is not mere medium of exchange. It has effect on production, investment, employment
level etc.

4. Supply and Demand theory: Supply and demand, in economics, relationship between the
quantity of a commodity that producers wish to sell at various prices and the quantity that
consumers wish to buy. It is the main model of price determination used in economic theory. The
price of a commodity is determined by the interaction of supply and demand in a market. The
resulting price is referred to as the equilibrium price and represents an agreement between
producers and consumers of the good. In equilibrium the quantity of a good supplied by
producers equals the quantity demanded by consumers.

Understanding the Law of Supply and Demand

The law of supply and demand, one of the most basic economic laws, ties into almost all
economic principles in some way. In practice, supply and demand pull against each other until
the market finds an equilibrium price. However, multiple factors can affect both supply and
demand, causing them to increase or decrease in various ways. It was extensively studied by
Murray N. Rothbard.

Law of Demand vs. Law of Supply

The law of demand states that, if all other factors remain equal, the higher the price of a good,
the less people will demand that good. In other words, the higher the price, the lower the quantity
demanded. The amount of a good that buyers purchase at a higher price is less because as the
price of a good goes up, so does the opportunity cost of buying that good. As a result, people will
naturally avoid buying a product that will force them to forgo the consumption of something else
they value more. The chart below shows that the curve is a downward slope.

Like the law of demand, the law of supply demonstrates the quantities that will be sold at a
certain price. But unlike the law of demand, the supply relationship shows an upward slope. This
means that the higher the price, the higher the quantity supplied. Producers supply more at a
higher price because selling a higher quantity at a higher price increases revenue.

Factors Affecting Supply

Production capacity, production costs such as labor and materials, and the number of competitors
directly affect how much supply businesses can create. Ancillary factors such as material
availability, weather, and the reliability of supply chains also can affect supply.

Factors Affecting Demand

The number of available substitutes, consumer preferences, and the shifts in the price of
complementary products affect demand. For example, if the price of video game consoles drops,
the demand for games for that console may increase as more people buy the console and want
games for it.

5. Residual Claimant Theory of Wages : The residual claimant refers to the economic agent
who has the sole remaining claim on an organization's net cash flows, i.e. after the deduction of
precedent agents' claims, and therefore also bears the residual risk Residual risk is defined in this
context as the risk associated with differences between the stochastic inflows of assets into the
organization and precedent agents' claims on the organization's cash flows. Precedent agents'
claims on an organization's cash flows can consist of e.g. employees' salaries, creditors' interest
or the government's taxes.

The concept of the residual claimant has been the subject of as well as used in over 8,000
scholarly articles, notably in law and economics, information economics and corporate
finance.Its use can be traced back to the late 19th century and Francis Amasa Walker's 'residual
claimant theory',which argues that in the distribution of wealth among profits, rent, interest and
wages, the laborer is the residual claimant and wages the variable residual share of wealth,
thereby going against the established view of profits as the residual share and igniting a debate
with Simon Patten, Jacob Hollander and James Bonar.

Residual claimancy is generally required in order for there to be moral hazard, which is a
problem typical of information asymmetry. This is specifically the case for the principal–agent
problem

Concept of Wages

Some of the most important methods of wages payment are as follows: 1. Minimum Wage 2.
Living Wage 3. Fair Wage 4. Need-Based Minimum Wage.

These definitions are considered here one by one:

1. Minimum Wage:A minimum wage is a compensation to be paid by an employer to his

workers irrespective of his ability to pay. The Committee on Fair Wage’ has defined minimum
wage as “the wage must provide not only for the bare sustenance of life, but for the preservation
of the efficiency of the workers. For this purpose, minimum wage must provide some measures
of education, medical requirements and amenities”.

2. Living Wage:A living wage is one which should enable the earner to provide for himself and
his family not only the bare essentials of food, clothing and shelter but a measure of frugal
comfort including education for his children, protection against ill-health, requirement of
essential social’ needs and a measure of insurance against the more important misfortunes,
including old-age. Thus, a living wage represents a standard of living. A living wage is fixed
considering the general economic conditions of the country.

3. Fair Wage:Fair wage, according to the committee on Fair Wage, is the wage which is above
the minimum wage but below the living wage. The lower limit of the fair wage is obviously the
minimum wage; the upper limit is set by the capacity of the industry to pay. The concept of fair
wage is essentially linked with the capacity of the industry to pay.

The fair wage depends on considerations of such factors as:

(i) The productivity of Labour,

(ii) The prevailing rates of wages in the same or neighboring localities,

(iii) The level of the national income and its distribution, and

(iv) The place of the industry in the economy of the country.

4. Need-Based Minimum Wage: The Indian Labour Conference in its 15th session held in July
1957 suggested that minimum wage should be need based and should ensure the minimum
human needs of the industrial worker, irrespective of any other consideration.

The need-based minimum wage is calculated on the following bases:

(i) The standard working class family should be taken to consist of 3 consumption units for the
earner; the earnings of women, children and adolescents should be disregarded.

ii) The minimum food requirements should be calculated on the basis of the net intake of 2 700
calories, as recommended by Dr. Akroyd, for an average Indian adult of moderate activity.

(iii) The clothing requirements should be estimated at a per capita consumption of 18 yards per
annum which would mean an average worker’s family of 4, a total of 72 yards.

(iv) In respect of housing, the norms should be the minimum rent charged by the Government in
any area for houses provided under the Subsidized Housing Scheme for low income groups.

(v) Fuel, lighting and other miscellaneous items of expenditure should constitute 20 per cent of
the total minimum wage.
Constitutional Provisions regarding Wages

In Randhir Singh v. Union of India, the Supreme Court has held that although the principle of
'equal pay for equal work' is not expressly declared by our Constitution to be a fundamental
right, but it is certainly a constitutional goal under Articles 14, 16 and 39 (c) of the Constitution.

In Dhirendra Chamoli v. State of U.P.it has been held that the principle of equal pay for equal
work is also applicable to casual workers employed on daily wage basis. Accordingly, it was
held that persons employed in Nehru Yuwak Kendra in the country as casual workers on daily
wage basis were doing the same work as done by Class IV employees appointed on regular basis
and, therefore, entitled to the same salary and conditions of service. It makes no difference
whether they are appointed in sanctioned posts or not. It is not open to the Government to deny
such benefit to them on the ground that they accepted the employment with full knowledge that
they would be paid daily wages. Such denial would amount to violation of Article 14. A welfare
State committed to a socialist pattern of society cannot be permitted to take such an argument.

F.A.I.C. and C.E.S. v. Union of India[4]- the Supreme Court has held that different pay scales
can be fixed for government servants holding same post and performing similar work on the
basis of difference in degree of responsibility, reliability and confidentiality, and as such it will
not be violative of the principle of equal pay for equal work, implicit in Article 14.

In Mewa Ram v. A.I.I. Medical Science,[6] the Supreme Court has held that the doctrine of
'equal pay for equal work' is not an abstract doctrine . Equality must be among equals, unequals
cannot claim equality. Even if the duties and functions are of similar nature but if the educational
qualifications prescribed for the two posts are different and there is difference in measure of
responsibilities, the principle of equal pay for equal work would not apply.

Components of Wages

Basic Pay

Dearness allowance

House rent allowance

City compensatory allowance

Overtime wages (but not to be taken into account for determining the coverage of an employee)

Payment for day of rest

Production incentive

Bonus other than statutory bonus

Night shift allowance

Any travelling allowance or the value of any travelling concession-conveyance allowance.

Heat, Gas & Dust Allowance

Payment for unsubstituted holidays

Meal/Food allowance

Suspension allowance

Children education allowance (not being reimbursement for actual tuition fee).
 Minimum Wages Act 1948

Introduction and Constitutional Validity: India introduced the Minimum Wages Act in 1948,
giving both the Central government and State government jurisdiction in fixing wages. The act is
legally non-binding, but statutory. Payment of wages below the minimum wage rate amounts to
forced labour. Wage Boards are set up to review the industry’s capacity to pay and fix minimum
wages such that they at least cover a family of four’s requirements of calories, shelter, clothing,
education, medical assistance, and entertainment.

Under the law, wage rates in scheduled employments differ across states, sectors, skills, regions
and occupations owing to difference in costs of living, regional industries' capacity to pay,
consumption patterns, etc. Hence, there is no single uniform minimum wage rate across the
country and the structure has become overly complex.

Coverage

The minimum wage system in India does not have universal coverage and follows what might be
termed a positive list approach. The Minimum Wages Act, 1948, applied only to employments
listed in the Schedule of the Act. Part I of the Schedule initially included a limited number of
employments in manufacturing, plantation, construction, public motor transport and mining and
under any local authority. Part II of the Schedule comprehensively covered employment in
agriculture including livestock. However, Section 27 of the Act authorizes state governments to
add any employment to either part of the Schedule. State governments have been making
additions to the list of scheduled employments and the coverage now is much wider than when
the original law was enacted.

Objectives of the Act

1. To safeguard that the employee has a basic physical necessity, proper health, and comfort.

2. Ensure that the labor gets fair wages.

3.To ensure that the labor lives a decent life and have a respectable name in society.

Procedure for fixation and revision of minimum rates of wages

 1. Time Rate – The minimum rate is fixed according to the duration of the work done by the
labor.

2. Piece Rate – Here the minimum wage is fixed by the total number of pieces manufactured in
the factory.

3. Overtime Rate – Here the minimum rate is fixed by the overtime done by the labor
regardless of the time or piece rate.

Wage Committee

A wage committee shall be formed by the appropriate government, which shall consist of
members from both the employer and employee side. Therefore, an independent person with
having no interest in the employment scheme shall be appointed as the chairman of the wage
committee. The appointment process in the Minimum Wages Act is made in this way so that
there is no scope of discrimination to the labors.

Advisory Board

Section 7 of the Minimum Wages Act, the Advisory Board, which proposes recommendations
and changes to be brought in labor laws. The advisory board proposes a recommendation to the
State and Central Government in fixing the minimum wages.

According to Section 9 of the Act, it talks about the appointment of committees and
subcommittees. The included members are:

1. A person appointed by the Appropriate Government.

2. Employers and employees, who belong to the scheduled employment and they shall be equal
in number.

3. Independent persons and they shall not exceed one-third of the total number of members. An
independent person will be appointed as chairman of the committee.

Wages in Kind
Section 11 says that the wages shall be paid in cash. If somewhere, the payment is done either
wholly or partly and if it is a customary process, then in that the case, the government through a
notification in the official gazette shall enforce the payment partly or wholly.

Consequences of Non – Compliance

Non- compliance of the Minimum wages act, i.e not paying minimum wages is a culpable
offense. Hence, violation of fixing hours also attracts the penal provision.

Imprisonment up to 5 years and a fine up to 10,000 is the maximum punishment that can be
awarded. Section 22 of the Act defines the sanctions.

Exemption and exceptions

(1) The appropriate government may subject to such conditions if any as it may think fit to
impose direct that the provisions of this Act shall not apply in relation to the wages payable to
disabled employees.

(2) The appropriate government if for special reasons it thinks so fit by notification in the
Official Gazette direct that subject to such conditions and for such period as it may specify the
provisions of this Act or any of them shall not apply to all or any class of employees employed in
any scheduled employment or to any locality where there is carried on a scheduled employment.

(2A) The appropriate government may if it is of opinion that having regard to the terms and
conditions of service applicable to any class of employees in a scheduled employment generally
or in a scheduled employment in a local area or to any establishment or a part of any
establishment in a scheduled employment it is not necessary to fix minimum wages in respect of
such employees of that class or in respect of employees in such establishment or such part of any
establishment as are in receipt of wages exceeding such limit as may be prescribed in this behalf
direct by notification in the Official Gazette and subject to such conditions if any as it may think
fit to impose that the provisions of this Act or any of them shall not apply in relation to such
employees.
(3) Nothing in this Act shall apply to the wages payable by an employer to a member of his
family who is living with him and is dependent on him.

(4)The Act allows different rates to be fixed for (i) different scheduled employments; (ii)
different classes of work in the same scheduled employment; (iii) adults, adolescents,
children and apprentices and (iv) different localities.

Explanation: In this sub-section a member of the employer's family shall be deemed to include
his or her spouse or child or parent or brother or sister.

Gujarat is one of the states with a simple structure. There are three levels of minimum wages for
skilled, semi-skilled and unskilled categories, which are the same for all scheduled employments.

At the other end of the spectrum are states with a very complex minimum wages structure. In
Karnataka, minimum wages have been fixed at many levels in each employment and separately
for two or three zones. An important feature is that there is only a small difference in the
minimum wage fixed for different skill categories. For instance, in the electronics industry, the
monthly minimum wage in Zone A for highly skilled categories is Rs. 7785.80, for skilled it is
Rs. 7262.80, for semi-skilled it is Rs. 7089.80 and unskilled it is Rs. 6831.80, a difference of
about 12 per cent across the four levels of the skills. The maximum zonal difference comes to
about nine percent.

Maharashtra also has a highly complex minimum wages structure. Various scheduled
employments have different levels of minimum wages with substantial variations. For instance,
for Zone I, the wage rate for unskilled workers is Rs. 7566 for automobile repairing, Rs. 7082.3
for bakeries, Rs. 4580.8 for the cement industry, and Rs 10959 for the construction of
roads.

Wage fixing machinery

For fixing wages for various employments, two alternative procedures are prescribed – the
committee method or the notification method: the appropriate government may either appoint
committees to hold enquiries and advise it or it may publish its proposals and ask the
stakeholders to furnish comments. The government notifies the fixed minimum wages after
considering either the comments of stakeholders or the recommendations of the committee or
committees. When the government fixes minimum wages after publishing its proposals and
obtaining comments, it must also obtain the comments of the Advisory Board, which the
appropriate government is mandated to appoint for the purpose of co-ordinating the work of
committees and sub-committees and advising government generally on the matter of fixing
wages. The central government may also appoint a Central Advisory Board for the purpose of
co-ordinating the work of the advisory boards. These boards and the committees must consist of
persons representing employees and employers in equal numbers and one-third of the members
have to be independent persons.

Provision on overtime

Regarding overtime payment, Section 59 of the Factories Act, 1948, already stipulates that the
worker will be entitled to twice the ordinary wage rate. This provision applies only to
establishments that come under the definition of factories. Separately, Rule 25 of the Minimum
Wages Rules provides that in the case of scheduled employments, overtime payments will be
double the ordinary wage rate, thus extending the applicability of overtime wages at the rate of
200 per cent of ordinary wages to establishments other than factories. The ILO recommendation
is for the overtime wage to be 125 per cent of the normal wage, but Indian law prescribes a
considerably higher level.

National Minimum Wage Policy

While there is little justification for fixing a nation-wide minimum wage valid for the country as
a whole, there may be good reasons to have a national minimum wage policy. The concept of a
national wage policy would imply that the elements of minimum wage would be spelt out and
various state governments and the central government in the central sphere would translate these
elements in terms of rupees per month, per day or per hour. In fact, five elements have already
been spelt out by the 15th Session of the Labour Conference (1957) and a sixth element was
added by the Supreme Court in 1991. These elements would need to be updated to take into
account the evolution of public policy in such areas as food security, compulsory elementary
education, health infrastructure and other areas. The evolving concept of poverty level will also
need to be factored into the new definition.
 Code of Wages 2019

The Code on Wages, 2019 was introduced in Lok Sabha by the Minister of Labour, Mr. Santosh
Gangwar on July 23, 2019. It seeks to regulate wage and bonus payments in all employments
where any industry, trade, business, or manufacture is carried out. The Code replaces the
following four laws: (i) the Payment of Wages Act, 1936, (ii) the Minimum Wages Act, 1948,
(iii) the Payment of Bonus Act, 1965, and (iv) the Equal Remuneration Act, 1976.

Coverage: The Code will apply to all employees. The central government will make wage-
related decisions for employments such as railways, mines, and oil fields, among others. State
governments will make decisions for all other employments.

Wages include salary, allowance, or any other component expressed in monetary terms. This
does not include bonus payable to employees or any travelling allowance, among others.

Floor wage: According to the Code, the central government will fix a floor wage, taking into
account living standards of workers. Further, it may set different floor wages for different
geographical areas. Before fixing the floor wage, the central government may obtain the advice
of the Central Advisory Board and may consult with state governments.

The minimum wages decided by the central or state governments must be higher than the floor
wage. In case the existing minimum wages fixed by the central or state governments are higher
than the floor wage, they cannot reduce the minimum wages.

Fixing the minimum wage: The Code prohibits employers from paying wages less than the
minimum wages. Minimum wages will be notified by the central or state governments. This
will be based on time, or number of pieces produced. The minimum wages will be revised and
reviewed by the central or state governments at an interval of not more than five years. While
fixing minimum wages, the central or state governments may take into account factors such as:
(i) skill of workers, and (ii) difficulty of work.
Overtime: The central or state government may fix the number of hours that constitute a normal
working day. In case employees work in excess of a normal working day, they will be entitled to
overtime wage, which must be at least twice the normal rate of wages.

Payment of wages: Wages will be paid in (i) coins, (ii) currency notes, (iii) by cheque, (iv) by
crediting to the bank account, or (v) through electronic mode. The wage period will be fixed by
the employer as either: (i) daily, (ii) weekly, (iii) fortnightly, or (iv) monthly.

Deductions: Under the Code, an employee’s wages may be deducted on certain grounds
including: (i) fines, (ii) absence from duty, (iii) accommodation given by the employer, or (iv)
recovery of advances given to the employee, among others. These deductions should not exceed
50% of the employee’s total wage.

Determination of bonus: All employees whose wages do not exceed a specific monthly amount,
notified by the central or state government, will be entitled to an annual bonus. The bonus will
be at least: (i) 8.33% of his wages, or (ii) Rs 100, whichever is higher. In addition, the employer
will distribute a part of the gross profits amongst the employees. This will be distributed in
proportion to the annual wages of an employee. An employee can receive a maximum bonus of
20% of his annual wages.

Gender discrimination: The Code prohibits gender discrimination in matters related to wages
and recruitment of employees for the same work or work of similar nature. Work of similar
nature is defined as work for which the skill, effort, experience, and responsibility required are
the same.

Advisory boards: The central and state governments will constitute advisory boards. The
Central Advisory Board will consist of: (i) employers, (ii) employees (in equal number as
employers), (iii) independent persons, and (iv) five representatives of state governments. State
Advisory Boards will consist of employers, employees, and independent persons. Further, one-
third of the total members on both the central and state Boards will be women. The Boards will
advise the respective governments on various issues including: (i) fixation of minimum wages,
and (ii) increasing employment opportunities for women.
Offences: The Code specifies penalties for offences committed by an employer, such as (i)
paying less than the due wages, or (ii) for contravening any provision of the Code. Penalties
vary depending on the nature of offence, with the maximum penalty being imprisonment for
three months along with a fine of up to one lakh rupees.